Today after the close PayPal (PYPL) will report its Q2 earnings. The options market is implying about a 7% one-day move in either direction tomorrow which is in line with its average over the last four quarters.
Shares of PYPL are up nearly 70% on the year and up 120% from its March lows. The uptrend from the lows is has been steep, with the stock gaining more than $100 billion in market capitalization…
But since breaking below the uptrend earlier in the month, the stock has been consolidating and once again threatening to make a new high:
Wall Street analysts are generally very positive on the stock with 37 Buy ratings, only 8 Holds and 1 Sell despite the stock’s rich valuation, trading 43x expected 2021 eps growth of 24% on expected sales growth of 17%.
Bulls contend that the company is uniquely positioned to command a large piece of what will be a massive electronic payments business that has only been accelerated by the pandemic, per Credit Suisse analyst Timothy Chiodo who rates the stock a Buy with a $190 price target on their opportunity in a note to clients late last month:
As for expectations into the print, here is my buddy Jared Weisfeld’s (Tech Specialist at Jeffries and Fast Money guest) take on the Set-Up in a note to clients this morning:
Expectations were high last quarter and PYPL certainly delivered on all key metrics and it was very clear that e-commerce as a category was gaining share at a staggering rate. Walking away from last quarter’s print, our research team summed it up perfectly: “The inherent value of the business is clearly higher going forward”. On May 1, PYPL had their largest single day of transactions in the Company’s history, larger than last year’s transactions on Black Friday or Cyber Monday.
Net new actives hit record highs in April surging over 140% from January and February levels averaging approximately 250,000 net new active (NNAs) accounts per day for the month of April. A majority of the NNAs are coming from PYPL’s core markets where PYPL has strong brand attributes. Throughout the month of April, the number of daily transactions on a 7 day moving average had grown by 25%. The print and post-print set-up were so strong that despite the surge in shares ($146 at the time), I added to my Favorite Names List. Fast forward to today, expectations are even higher as PYPL is now +64% YTD and shares are pricing in an 8% implied move post-print. Let’s get to the bogey.
Last quarter, TPV of $191BN grew 18% y/y, but was impacted by the month of March, with TPV growth dropping to just 7% y/y. It quickly recovered and grew 22% y/y in April. Additionally, revenue grew 20% y/y in the month of April, and when asked on the conference call why the they guided to just 15% y/y revenue growth for Q2, most walked away thinking that guidance was quite conservative. From a June quarter TPV perspective, despite a sell-side note away calling for an insane bogey (NFLX style), buyside is looking for 30% y/y growth and expectations are likely higher post SHOP this morning. Recall, TPV will out-grow revenue as Venmo contributes disproportionately to TPV vs. revenue.
My Take into the print? Clearly a great story, expectations are high and the stock reflects that. It is hard to look at Shopify’s results this morning, and the stock’s 12% gap to new highs and NOT extrapolate to PYPL:
But let’s see how it act into the close as investors who have been long might start pricing in a sort of “as good as it gets” scenario for some of these highfliers:
So what’s the trade?
If I were inclined to play for a SHOP-esque breakout I might consider a weekly call spread, risking what I am willing to lose and targeting the stock’s implied move, for instance:
Bullish Trade Idea: PYPL ($182.50) Buy July 31st weekly 185 – 205 call spread for ~$4
-Buy to open 1 July 185 call for $5
-Sell to open 1 July 205 call at $1
Break-even on July expiration (Friday):
Profits of up to 16 between 189 and 205 with a max gain of 16 above 205
Losses of up to 4 between 185 and 189 with max loss of 4 below 185
Rationale, as regular readers know I hate binary trades like this, get the direction wrong and trade losses most of its value by lunchtime tomorrow. But this is also the sort of market where traders are looking to take shots on goal. the only way this makes sense to me is to do so with defined risk.
This trade idea risks 2.2% of the stock price, has a break-even up 3.5% with a max potential gain of up to 9% of the stock price if it is up 12% in two days.
If I were inclined to play for a deceleration in growth and a pullback to $160 in the coming days I might consider the following put spread in Aug expiration:
Bearish Trade Idea: PYPL ($182.50) Buy Aug 180 – 155 put spread for $6
-Buy to open 1 Aug 180 put for $7.35
-Sell to open 1 Aug 155 put at $1.35
Break-even on Aug expiration:
Profits of up to 19 between 174 and 155 with max gain of 19 at 155 or lower
Losses of up to 6 between 174 and 180 with max loss of 6 above 180
Rationale: this trade idea risk 3.3% of the stock price, allows for the trade to play out over three weeks, has a break-even down 4.6% and a max potential again of 10% of the stock price if it is down 15% on Aug expiration.
But, I’ll offer my usual disclaimer when trading long premium directional strategies into events like earnings, you need to get a lot of things right at the same time to merely break-even, first and foremost direction, then magnitude of the move and timing.